Ensuring effective and fair taxation across the Single Market is crucial to stimulating a real recovery after the COVID-19 pandemic. In an opinion adopted at its March plenary session, the European Economic and Social Committee (EESC) supported the European Commission (EC) proposal on the misuse of shell companies for tax purposes. This is purely a tax directive proposal, however, and the Commission needs to dig deeper into the topic, and address other key issues related to shell companies.
The Committee fully supports the Commission's choice of seeking to ensure a common legal framework among Member States. The use of broad public consultation is also greatly appreciated. Furthermore, the EESC considers the proposal to be in line with existing legislative initiatives, and with the proportionality principle. It is important, however, that the EC and national tax authorities have adequate resources to manage the necessary checks and share the resulting information. These checks should be carried out not only on corporate income but also on assets, and the EESC hopes that the findings will be made available to the public. Lastly, common and clear rules need to be drawn up on the specific content of the declarations required from undertakings, and targeted rules to prevent the activity of "professional enablers" should be detailed in separate legislation.
The proposed Directive is one of the specific short-term initiatives announced on 18 May 2021 in the European Commission's Communication on Business Taxation for the 21st century. This proposal targets legal entities with no real substance or economic activity, known as shell companies, which could be used for improper tax purposes, such as tax evasion, tax avoidance, and even money laundering.
EESC rapporteur Benjamin Rizzo comments,
The EESC fully supports the EC proposal and its overall objectives. Shell companies that have been set up in Member States need to be brought into line with the Commission proposal, and collaboration between Member States is more imperative than ever to avoid eroding the EU's fiscal powers.
Assets must also be checked
Companies holding assets for private use, such as real estate, yachts, jets, artwork or equity alone may have no income for long periods of time, but can still create significant tax benefits for their controlling companies. The EESC therefore believes that checks should be not just on income, but also on assets, as taxes can be levied even where no income is generated, such as wealth taxes, for example. In order to manage these checks correctly and to share the information, the EC should have the appropriate powers and sufficient resources.
The substance test
The proposed Directive provides for a test aimed at helping Member States identify shell companies that are possibly being misused in order to obtain undue tax advantages. This known as a "substance test". The EESC suggests that the EC issues appropriate guidelines regarding this test, with particular regard to the meaning of specific terms such as "residence", "resident director" and "premises". Following this approach, national discrepancies and divergent interpretations potentially harmful for the internal market could be reduced or better addressed. In particular, the EESC calls on the Commission to duly consider the new digital models of business in this respect.
The problem of "professional enablers"
Knowledge of the beneficial owners of shell companies and their assets, and of the real owners of the transactions they carry out is essential in order to unravel the real nature of their activities, and to understand the extent of any tax evasion or money laundering that may have been committed. The hiding of beneficial ownership through chains of shell companies, managed by so-called "professional enablers", is inherent to their criminal purposes. The EESC urges the Commission to follow the OECD approach to the subject matter, and to pay specific attention to the role of these "professional enablers", an issue not mentioned in the current proposal. Addressing this would be a preventive measure to reduce any possible illegal use of shell companies. The Committee also believes that the cooperation of professional supervisory bodies on the matter would be of great value.
If the Directive against shell companies complements the Commission's Anti Money Laundering legislative package, a rule against "professional enablers" running shell companies should further complement it, says co-rapporteur Javier Doz Orrit.
Knowing the real owners of shell companies would make it easier to block the Russian oligarchs of Putin's regime. One more reason to say "no more tolerance of tax fraud and money laundering, he adds.
Other missing key elements
In its opinion, the EESC also reiterates the need to have a complete and wide-ranging EU list of non-cooperative tax jurisdictions located outside the EU, so that EU companies can see whether the funds and assets they manage are connected to shell companies located outside the EU.
Lastly, the Committee notes that shell companies can also be set up and used to facilitate undeclared work and to avoid paying social security contributions. Therefore, it suggests that the EC consider the possibility of addressing such issues in European legislation in addition to the proposal at hand, which is purely a tax directive.